Should Weakness in iFabric Corp.'s (TSE:IFA) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
With its stock down 18% over the past three months, it is easy to disregard iFabric (TSE:IFA). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to iFabric's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for iFabric
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for iFabric is:
1.8% = CA$431k ÷ CA$23m (Based on the trailing twelve months to June 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.02.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
iFabric's Earnings Growth And 1.8% ROE
It is quite clear that iFabric's ROE is rather low. Even compared to the average industry ROE of 14%, the company's ROE is quite dismal. iFabric was still able to see a decent net income growth of 16% over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.
We then performed a comparison between iFabric's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is iFabric fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is iFabric Making Efficient Use Of Its Profits?
iFabric doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.
Conclusion
On the whole, we do feel that iFabric has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for iFabric by visiting our risks dashboard for free on our platform here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
